Bank of Canada governor Mark Carney cautions the U.S. will go into recession if it fails to engineer a sharp reduction in the budget deficit and reach a deal over the $600 billion tax increases and spending cuts.
And Canada won't be able escape unscathed, he added.
When asked about his views on the looming U.S. fiscal cliff at a Toronto CFA Society event Tuesday, Carney said if the situation is not resolved "the U.S. economy will go into recession and that would have a direct impact on Canada, and we'd also have a material financial market impact."
Although these relatively extreme events are not incorporated in the BoC's expectations, Carney said the persistence of "the mess in the U.S." may "necessitate policy changes" in Canada.
However, the BoC does have a forecast that "the U.S. situation will continue to recover" because some resolution of fiscal cliff will be reached, assured Carney.
Going by the prevailing market sentiment, though, there are signs that investors are starting to get nervous even if the market hasn't so far priced in a significant fiscal cliff event.
A new Sun Life/Ipsos Reid study shows the majority of Canadians (63%) are worried the U.S. fiscal cliff will hurt our economy.
The survey finds 54% of Canadians are also worse off financially than they were a year ago.
"Along with high debt levels and a slowing real estate market in Canada, the fiscal cliff situation in the U.S. is giving Canadians another reason to worry about the Canadian economy," says Sadiq S. Adatia, CIO, Sun Life Global Investments.
Additional highlights include:
- Ontarians (31%) and Quebecers (28%) are most pessimistic about the economy in 2013.
- 70% of Ontarians are concerned about the effects of the U.S. fiscal cliff
- 60% of Ontarians and 57% of Atlantic Canadians say they're worse off financially than a year ago, compared to the national average of 54%